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Is Aventus Retail Property Fund’s monster dividend yield too good to refuse?

In early afternoon trade the Aventus Retail Property Fund (ASX: AVN) share price has pushed higher by 1.5% to $2.11 following the release of the property group’s half-year results.

For the six months ended December 31 2017, Aventus delivered a 3.4% increase in funds from operations (FFO) on the corresponding period to $45 million. On a per unit basis, FFO came in at 9.1 cents.

A key driver of this FFO growth was the high occupancy levels achieved by its property portfolio. Aventus finished the period with an occupancy level of 98.6% after recording a substantial reduction in lease expiries. Lease expiries for FY 2018 currently stand at 6%, compared to 11% at the end of FY 2017.

Current tenants include the likes of the Wesfarmers Ltd (ASX: WES) operated Bunnings business, JB Hi-Fi Limited (ASX: JBH), and Harvey Norman Holdings Limited (ASX: HVN). At the end of the period these three companies accounted for 16% of the group’s income.

Aventus also received a boost from property revaluations during the half. Revaluation increases take into account annual rent increases, market rent reviews, positive leasing spreads, completion of a number of asset management and development initiatives together with reductions in capitalisation rates.

Revaluation gains on its properties were $58 million, equating to 4.2% growth on the end of FY 2017. This brought the value of the portfolio to $1.85 billion post settlement of the Tweed homemaker centre it offloaded late last year.

As a result of these revaluations and the transactions undertaken, the weighted average capitalisation rate of the portfolio tightened to 6.69%.

During the half distributions were 8.1 cents per unit. This represents a payout ratio of 90% of FFO, within the company’s distribution policy of 90% to 100% of FFO.

Looking ahead, management believes that the portfolio is of a high quality and well positioned to capture the impacts of population and economic growth after its recent transactions and divestments. This is especially the case given that 92% of its portfolio by value is located in the high growth eastern states of Australia and predominantly metropolitan locations.

For the remainder of FY 2018 it has forecast full-year FFO per unit to be 2% to 3% higher than in FY 2017 at approximately 18 cents to 18.2 cents. If it pays out 90% of its FFO this will mean a full-year distribution of approximately 16.3 cents per unit, equating to a yield of 7.7% based on the current share price.

Should you invest?

I think Aventus is a great option for income investors. The strong yield, strong occupancy levels, and high quality tenants lead me to believe that the company is more than capable of growing its FFO and distributions in the low-to-mid single digits for some time to come.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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